Taxpayers to lose if hospital suffers the stage-two blues

Ben Butler

The Victorian Funds Management Corporation's decision to buy more than $1 billion in bonds used to fund the Royal Children's Hospital redevelopment means the taxpayer will bear the brunt if anything goes wrong with the project.

At the time the VFMC approved the deal, in June 2007, the risks would have appeared remote.

The bulk of the bonds - effectively loans - were guaranteed by New York-based insurer FGIC, which promised to pick up the tab if there was a shortfall in repayments by hospital consortium Children's Health Partnership.

That gave the bonds the best available rating, AAA, with ratings agency Standard & Poor's.

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However, that was before the global financial crisis, which wiped out the leader of the Children's Health Partnership syndicate, investment bank Babcock & Brown, and rendered FGIC's guarantees worthless. S&P now rates the bulk of the bonds BBB, the second-lowest investment grade, and in December slapped a ''junk'' rating of BB on a small tranche, worth about $58 million.

As S&P sees it, the problem is not the construction of the hospital complex. Stage one, which houses the hospital itself, is fully operational and the ratings agency is confident builder Lend Lease will finish stage two, which is to contain a hotel and commercial space, by its deadline of December.

Children's Health Partnership has two main sources of income to pay off the bonds and make a profit: payments from the government to use the hospital and rent from private tenants such as the hotel, shops and doctors' consulting rooms.

It is this second income stream that is under pressure. If rents don't pick up by the time stage two is finished, the project could have a problem.

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